Legally Renege On Your Mortgage

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Congratulations! You just signed the closing papers on your mortgage loan.

Terrifying, isn't it? Are you having second thoughts about your decision?

If you have just signed the closing papers for a home purchase, it's too late. You have made your commitment. However, in some cases with refinancing or a home equity line of credit (HELOC), you have a short rescission period in which you may back out of the deal without penalty.

The Truth in Lending Act (TILA) created the right of rescission in certain circumstances, allowing borrowers three full days to reconsider their decision and rescind the deal with no questions asked. Three things must take place before the three-day period begins: you must have signed the promissory note, received the Closing Disclosure form that summarizes the terms and conditions of your mortgage loan, and received two copies of the notice that explains your rights of rescission.

Rescission applies to refinances on owner-occupied homes only (no rentals, vacation homes, or investment properties), and only when the refinancing is through a different mortgage lender than the one that provided the original mortgage loan. An exception is a cash-out refinance with the original lender, where a rescission period is available on the cash-out portion alone. Rescission is always available on a HELOC with one exception: it is not applicable when the entire credit line amount is used for a purchase transaction (such as a second mortgage).

You must submit your rescission form in writing to the lender, using either the form provided with the explanation of rescission rights or a similar letter. Keep a copy of your letter and note when the letter was mailed in order to prove that your notification was within the three-day window.

The first day is considered to be the first business day after the last of the three events above are completed, including Saturdays but not Sundays. Legal public holidays are also excluded. You have until midnight on the third day to rescind (but keep in mind you will need to provide proof that the written notice was at least mailed on time, a difficult task if you decide at 11pm on the third day).

When the right of rescission is exercised, the lender has twenty days to refund most of the fees associated with the loan and give up claim to the property in question. The only fees that are not subject to refund are those paid by the borrower to a third party that is not considered to be part of the credit transaction (for example, building permits). Application and processing fees, appraisal and title fees, brokerage fees, and other fees directly related to the loan must be refunded.

If your disclosure form or rights of rescission notice was not received at closing or contained incorrect information, it's possible that you can rescind your loan well past the three-day period (up to three years according to the Consumer Financial Protection Bureau). Find legal representation to explore your options in this case.

Before signing a closing document, you should make sure that you have received the proper Closing Disclosure form and rescission rights document and have had enough time to read and understand them.

Changing your mind that late in the home buying process poses many difficulties, and it puts the lender in a difficult position – but it is your right. Think about it carefully, but exercise your right of rescission if necessary. Just make sure that you do it in writing and within the proper timeframe.